In an effort to re-invent itself in response to the financial crisis, the Securities and Exchange Commission (SEC) recently announced a series of reforms designed to substantially strengthen its ability to police the markets. Among other things, the Division of Enforcement has undertaken "the biggest reorganization . . . in more than 30 years." This includes introducing:

The SEC has also delegated its power to issue subpoenas to senior staff, making it easier to initiate formal investigations. Perhaps most importantly, the Enforcement Division has been re-tooled. Now armed with the ability to enter into co-operation, deferred prosecution and non-prosecution agreements, the SEC has at its disposal new mechanisms that will afford it the type of leverage previously reserved for criminal law enforcement agencies.

The SEC's transformation coincides with its adoption of an increasingly aggressive posture towards insider trading cases, many of which have targeted foreign nationals or concerned activities that primarily took place outside the US.

SEC v Condroyer. In some cases, the agency is moving expeditiously to bring actions even where they are based (at least initially) on bare bones allegations.

In SEC v Condroyer, 09-cv-3600 (N.D. Ga.), two French citizens residing in Belgium purchased out-of-the-money call options for Chattem common stock between 7 December and 17 December that they sold on 21 December, immediately following Chattem's announcement that it was being acquired by Sanofi-Aventis. Less than 24 hours later, the SEC filed an action. Remarkably, the complaint did not contain the key facts generally considered central to any insider trading case, such as the source of the inside information, evidence that defendants knew each other, or that defendants knew anyone at either company. Instead, the SEC based its claims entirely on allegations concerning the timing and magnitude of the trading activity.

SEC v Rorech. In other cases, the SEC is suing based on novel theories that could substantially broaden the scope of liability under the Securities Exchange Act of 1934 should they gain widespread acceptance by US courts.

In SEC v Rorech, the SEC pushed to expand the reach of Section 10(b) by bringing its first insider trading case involving credit default swaps (CDSs) (2009 U.S. Dist. LEXIS 115305 (S.D.N.Y. Dec. 10, 2009)). In that case, the SEC alleged that a bond and CDS salesperson at Deutsche Bank learned of a proposed bond offering to be underwritten by his firm and subsequently tipped a portfolio manager at Millennium Partners who purchased related CDSs, which the portfolio manager sold weeks later following the announcement of the offering (Id. at 7-9). The defendants moved to dismiss the action, arguing that a CDS is not a "security-based swap agreement" covered under Section 10(b) as the premium is not "based on" price, yield, value or volatility of the underlying bond (Id. at 11-12). The court refused to dismiss the case, noting, among other things, that there is a secondary market for CDSs in which their price may be based, at least in part, on the value of the underlying bond (Id. at 14-17).

SEC v Dorozhko. The SEC has also recently urged a broad reading of Section 10(b) that captures trading by outsiders who owe no fiduciary or other duty to the source of the non-public information on which they traded.

In SEC v. Dorozhko, the SEC alleged that the defendant, a Ukraine national and resident, bought "extremely risky" out-of-the-money put options for IMS Health hours before the company unexpectedly announced negative earnings based on information he obtained by 'hacking' into a secure computer network (574 F.3d 42, 43-45 (2d Cir. 2009)). The defendant sold the options the very next day (Id). Acknowledging that the defendant was an outsider who owed no duty to IMS Health or the owner of the computer network, the SEC argued his actions were "deceptive" because he misrepresented his identity to the computer server to gain unauthorised access. While the district court rejected the SEC's expansive interpretation of Section 10(b), the Second Circuit Court of Appeals reversed, holding 'hacking' "is plainly 'deceptive' within the ordinary meaning of the word" (Id. at 51).

Although initial efforts have met with some success, the SEC faces several hurdles. Resources are strained as a result of the fact that a smaller percentage of cases are being settled at an early stage and that the SEC is prosecuting fewer cases in parallel with the Department of Justice, leaving it to carry the burden alone. And some of the SEC's higher profile cases involving novel or expansive theories of liability – such as the action brought against Mark Cuban for insider trading – have been dismissed by the courts.

Whether the 'new' SEC's aggressive campaign will be effective thus remains an open question.